From remittance to bitcoin, this blog takes a look at China's developing market.
It is hard to believe that China, the second largest economy in the world with a population of 1.3 billion people, is considered a developing country.
Since initiating market reforms in 1978, ultimately shifting to a market based economy, China has experienced rapid economic and social development. Averaging a 10 percent GDP growth annually more than 500 million people have been lifted out of poverty; however, official data, provided by the World Bank, shows that “98.99 million people still live below the national poverty line of RMB 2,300 per year at the end of 2012.” As bad as this seems it could actually be much worse if not for the fact that China holds the second largest remittance market in the world. China received approximately $66 billion US in 2012 in terms of remittances which accounts for 0.8 percent of the GDP. Even though China represents 80 percent of all remittance flow into East Asia it also has the highest average transaction cost (10 percent), which suggests that regardless of the transaction cost people are still sending money back.
Bitcoin Comes in to Play
When it comes to virtual currencies China is no stranger, currently 80% of all Bitcoin is traded in Chinese Yuan and since Q4 of 2013, China has maintained more than 50% of the global Bitcoin market. This could largely be connected to China’s enormous gaming community, approximately 55.5 million gamers in 2009, which popularized virtual currencies through online multiplayer games. These players practiced what is known as “gold farming,” which is a time consuming, tedious process by which players would “farm” virtual game credits to buy virtual gear, like armor and weapons. The players would then sell the virtual goods through online marketplaces, like eBay, to other players who are unwilling to do the work.
This idea of trading virtual credits for cash or real goods and services can be seen as the precursor to Bitcoin mining; a process by which “miners” program computers to perform complex algorithms used to confirm transactions and increase security and for every confirmed transaction the “miner” is rewarded in Bitcoin. Mimicking the rate at which commodities like gold are mined, the awarded amount of Bitcoin is programmed to halve every four years, thus by 2140 the maximum number Bitcoins will be mined, capping the monetary base at 21 million. Coupling the idea of being able to exchange virtual products for real money and the large number of tech-savvy people interested in Bitcoin mining may have contributed the high volume of Bitcoin transactions in China.
How About Bitcoin Remittances?
Although Asian countries do not directly or openly tax remittances, it is not really an issue of how much is being remitted, but rather how is being picked up. Banks comprise of 75% of all remittance payout points in Asia with the remaining 25% consists of credit unions, retail stores, post offices, and other money transfer operators. This suggests that banks have more accessible locations and that people are willing to pay about 14% of the total cost as a remittance transfer fee because of it. This further implies that China’s government controls most of the remittance market, can control the transfer costs, and can limit the location of other payout points by replacing them with banks, ultimately making it more expensive to transfer money. It may seem like all is lost but using bitcoin could solve all these problems; in our previous blog, So You Want to Know About Bitcoin, we briefly discussed the benefits of bitcoin, but here are some ways it would be useful in China:
- As of 2014, there are over 649 million internet users meaning more people have easier accessibility to digital transactions.
- Bitcoin is a decentralized, money-like virtual commodity to facilitate peer-to-peer transactions.
- More secure than other forms of payments.
- No need of a third party, transfer fee is almost zero, or about 0.0001 bitcoin per transaction.
- Transfers would be validated in less than 10 minutes.
It is hard to pinpoint all the little details relating China’s large remittance market to the large volume of Bitcoin transactions as the research comparing the two is not quite there; however, it could be said that bitcoin, in one way or another, will play role in China’s economy in the future.